Condos, HOAs, and PUDs, Oh My

VA Lender’s Handbook Chapter 16 Summary

Many borrowers are interested in using their VA loan benefits to purchase a home in a condo project, homeowners association, or planned unit development. Chapter 16 of the VA Lender’s Handbook addresses these types of residences and many of the unique expectations that go along with them. While we’ve written a short series of articles exclusively on Chapter 16, we wanted to give you a summary of the information so you can decide whether you want or need to delve into it further. So in this article, we’re going to summarize most of the important information in the chapter, and if you need more information on a particular portion, you can check out the rest of our articles on chapter 16.

The VA Approved Condominium List

The VA maintains a list of condo projects that they have approved for the VA guarantee. In order to get on this list, a condo project must have paperwork and agreements that are acceptable to the VA. The biggest thing they look for limits to the borrower’s freedom to sell or modify the property. Often, when condo projects are denied, it is due to a clause that the borrower must give the administrators of the condo first option to purchase the property when they want to sell, or other similar limitations or liens on the home. A condo project having a lien on the home will not automatically disqualify it (since pretty much every condo project has a lien of some kind on the home), but the VA will look into the lien and make sure that it does not violate their terms of approval. Only condominiums are on this list; the VA does not maintain a list of approved HOAs or PUDs (planned unit developments).

“Except Under Certain Circumstances”

If all of the VA’s title requirements for any common interest communities could be summed up in one phrase, that would be it. For example, “the estate must not be less than fee simple, except under certain circumstances” and “title must not be subject to unreasonable restrictions on use and occupancy, except under certain circumstances,” and “VA regulations require that every VA loan be secured by a first lien on the property, except under certain circumstances.” So to every rule there is an exception. Any sort of common interest community generally has to have a lien that is subordinate to the VA-guaranteed mortgage. The first lien is one of the rules that has very, very few exceptions. The property will need to undergo a VA appraisal and the property’s inclusion in a condo project or HOA will usually affect the valuation of the property either negatively or positively. In addition, the presence of nonresidential units in the project or area will also be evaluated and considered when making a valuation of the property.

The Notice of Value For Condos or PUDs

Every notice of value issued for a property in a condo or PUD will have the following statement on it: “This property is located in a development with mandatory membership in a homeowners’ association. The lender is responsible for ensuring that title meets VA requirements for such property and that homeowner association assessments are subordinate to the VA-guaranteed mortgage.” In the appraisal report, which includes the notice of value, the appraiser must use the Uniform Residential Appraisal Report, or if it’s a condo, the appraiser must use the Individual Condominium Unit Appraisal Report. The condo appraisal report is a bit different from the Uniform report because condos are different enough to warrant it.

Getting a Condo Project Approved

You can work with a lender to submit a condo project for VA approval if it’s not currently approved. To do so, the lender needs to provide a written request to the VA for approval and include a copy of the condo’s organizational documents. VA reviews the documents to make sure that they are in compliance with their rules and notifies the lender accordingly. In some cases, the VA may ask for further documentation, usually in response to incomplete submissions, but may also be a result of unsatisfactory documentation and a required change by the condo project in order to be approved.